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Falkingham v Ottaway [1957] FJLawRp 5; [1956-1957] 5 FLR 31 (25 March 1957)

[1956-1957] 5 FLR 31

IN THE SUPREME COURT OF FIJI

Civil Jurisdiction

Action No. 224 of 1956

1. THOMAS FALKINGHAM
2. GEORGE FITZ-JOHN HALL
Petitioners

AND

1. ALFRED OTTAWAY
2. MRS. L. H. C. OTTAWAY
3. A. P. DEWAR
4. SHANTILAL
5. FIJI BUILDERS LTD.
6. METAL TRADERS INCORPORATED
7. CONSOLIDATED MANGANESE &
MINING CO. OF FIJI LTD. J
Respondents

Winding up petition-breach of duty by director in negotiating secretly on behalf of principal shareholder whose interest he represented.

This was a petition for the compulsory winding-up of a company known as Consolidated Manganese and Mining Company of Fiji Ltd. One, Mr. Lye, was Chairman of the directors of this company. Mr. Lye represented the interests of an enterprise known as Metal Traders Incorporated and this enterprise was in point of fact the controlling shareholder in the Consolidated Manganese and Mining Company of Fiji Ltd. The Consolidated Manganese and Mining Company of Fiji Ltd. negotiated unsuccessfully with third parties for the grant of certain mining rights. At the same time Mr. Lye secretly negotiated with these third parties for the grant of the same mining rights to Metal Traders Incorporated.

Held.-Mr. Lye was in breach of his duty as a director of the Consolidated Manganese and Mining Company of Fiji Ltd. in entering into arrangements to secure these mining rights on behalf of Metal Traders Incorporated, without the full knowledge and approval of the Consolidated Manganese and Mining Company of Fiji Ltd. given in general meeting.

Winding up order made.

Cases referred to:-

Regal (Hastings) Ltd. v. Gulliver [1942] UKHL 1; [1942] 1 All ER 378.; UKHL 1

Hamilton v. Wright [1842] 9 Clark and Finnelly House of Lords Cases 111.

Parker v. McKenna [1874] 10 Chancery Appeal Cases 96.

P. Rice for the petitioners.

R. Munro, A. D. Patel, J. N. Falvey, M. Tikaram for the respondents.

HAMMETT, J. [25th March, 1957]-

This is a petition for the winding up of Consolidated Manganese and Mining Company of Fiji Limited which for convenience I will call "the Company". The two petitioners, Messrs. Falkingham and Hall, are contributories of the Company which is incorporated in Fiji under the Companies Ordinance (Cap. 170) as a private company limited by shares.

The ground upon which the petition is based is that in the circumstances set out in the petition, it is just and equitable that the Company should be wound up.

The petition is opposed by the Company, by four contributories, namely Metal Traders Incorporated, Mrs. Ottaway and Messrs. Ottaway and Dewar and by two creditors, Fiji Builders Limited and Shantilal.

The petition was supported by the usual statutory affidavit. Affidavits have been filed on behalf of the Company and Metal Traders and by Mr. Ottaway and others opposing the petition and the first petitioner has filed a lengthy affidavit in reply.

At the trial, after hearing counsel and with the agreement of them all, leave was given for the following persons to be cross examined:-Mr. Falkingham, the first petitioner, Mr. Lye, a director, who swore the affidavit opposing the petition on behalf of the Company and Metal Traders Ltd., and Mr. Ottaway.

The Company was incorporated in January, 1954, for the purpose, inter alia, of mining manganese. Its capital is £23,000 divided into £1 shares.

It had insufficient capital to carry on its proposed mining operations and has been financed by Metal Traders Incorporated of New York. As a result of several transactions, the particulars of which it is not necessary to relate in detail, at the date of the presentation of this petition, i.e. 26th October, 1956, Metal Traders held 17,250 paid up £1 shares out of the total of 23,000 shares issued by the Company. It also held two debentures to secure advances of up to a total of £77,500 secured by way of a floating charge over all the Company's assets. Mr. Lye was appointed a director of the Company in November, 1954, to represent the interest of Metal Traders.

The ore mined by the Company has been sold exclusively to Metal Traders. It is the contention of the petitioners that Metal Traders, having secured effective control over the Company, has used this control to operate the Company for the benefit of Metal Traders to the detriment of the interests of the Company as a whole and its other contributories. This it is alleged to have done by arranging the sale of the Company's ore at prices below those obtainable in the open market.

Since the presentation of this petition, Metal Traders have appointed a receiver for them in their capacity as debenture holders. The court has also appointed a provisional liquidator.

Learned counsel for the petitioners summarised the grounds relied upon to support the petition as follows:-

1. The Company is carrying on business at a loss and without Vunamoli its assets are insufficient to pay its debts.

2. The business is now being carried on for the sole benefit of the debenture holders who have taken possession.

3. Mr. Lye, the representative of Metal Traders on the board of directors of the Company, has treated the business as that of Metal Traders and not that of the Company itself.

4. Mr. Lye has deliberately withheld information from the shareholders.

5. The misconduct of Messrs. Lye and Ottaway as directors has been such that it can only be investigated successfully on a winding up.

I have given the most careful consideration to all that has been urged both in support of and in opposition to this petition.

There have been grave allegations of fraud and dishonesty made against Mr. Lye by the petitioner, Mr. Falkingham, under cross examination and in re-examination. His counsel has been placed in a difficult and embarrassing situation by these allegations since not only were they not set out specifically and supported by an affidavit, as all allegations of fraud in winding up proceedings should be, but also in reply to the court at the outset before any evidence had been given under cross examination, his counsel intimated that he did not allege fraud.

I wish to state and record at once that there has been insufficient evidence to support what I can only term the somewhat extravagant allegations of fraud and dishonesty which have been made against Mr. Lye and Mr. Ottaway. In my opinion these allegations should never have been made.

I wish further to state that, there was no evidence to justify the reflections cast on the technical ability of Mr. Ottaway as a mining engineer.

A great part of the evidence relied on to support the petition was "hearsay". There is no admissible evidence whatever that Metal Traders have consistently purchased ore from the Company at prices substantially lower than the current market prices at the time, and I do not accept the allegations against Metal Traders in this respect.

This mining enterprise has only been in existence for three years. It is obvious that the initial capital expenditure of a mining enterprise in its opening stages is likely to exceed its income. There has been wholly insufficient evidence of the cost of production and the operating expenditure and income for the court to decide whether the Company is in fact operating at a loss or not to-day and if so whether the extent of its losses is greater than might reasonably be expected from an enterprise of this nature in these circumstances.

In my opinion, several of the grounds urged in support of this petition were insufficient to justify the court ordering a winding up of the Company against the wishes of the majority of its contributories and its secured creditors and several of its major unsecured creditors.

It is further my opinion that there was insufficient evidence to support the remaining grounds urged, with the exception of the issue concerning "Vunamoli" with which I will now deal.

Paragraph 23 of the petition reads as follows:-

"In the latter portion of the year 1954 the Company commenced negotiations with one Sitiveni Raidriwe concerning a proposed arrangement with the said Sitiveni Raidriwe representing a group of Fijian people in a certain mining venture and it was proposed that the Company should take over the said venture and that the said group be paid moneys on a royalty basis. These negotiations were still pending when your petitioner Falkingham was in Fiji in September, 1954. Search reveals that Lye is now registered as a partner with a fifty per cent interest in a venture known as Vunamoli Syndicate with the said Sitiveni Raidriwe as agent for a body known as the. 'Vunamoli Fijian Association' ."

In the affidavit of Mr. Lye dated 8th January, 1957, in opposition to the petition, these allegations are not disputed. It is admitted in paragraph 24 that Mr. Lye now holds a fifty per cent interest in the mining lease referred to in the petition which for the sake of brevity is called "Vunamoli". The matter was dealt with by Mr. Ottaway in his affidavit in opposition dated 12th January, 1957, at paragraph 26 as follows:-

"The Company through its solicitors negotiated to obtain Vunamoli mine from Sitiveni Raidriwe but it was unsuccessful in its negotiations."

The matter was dealt with in greater detail in Mr. Falkingham's affidavit in reply dated 8th February, 1957, in paragraph 14 (b) (I) to (VIII).

This petition first came before the court on 15th January, 1957, when it was adjourned on terms for the persons opposing it to file affidavits in support of their opposition.

At the adjourned hearing on 4th March, 1957, before any evidence was given, learned counsel for the Company and for Metal Traders for the first time sought an order that paragraph 23 of the petition be struck out. This application was made on the ground that it contained an allegation of fraud and was not supported by an affidavit setting out the facts of the alleged fraud specifically. In support of this application the case of Re S. A. Hawkins Ltd. [1950] 2 All ER p. 408 was cited.

In opposing this application learned counsel for the petitioners argued that such an application, if it was made at all, should have been made before the paragraph 23 of the petition had been pleaded to in the affidavits in opposition. He pointed out that the facts had now been sworn to in Mr. Falkingham's affidavit in reply. He further stated that the allegation against Mr. Lye did not amount to fraud but to something in the nature of a breach of trust as a director of the Company.

The parties opposing the petition knew clearly the case they had to meet well before the 4th March, 1957, the date fixed for the hearing and have not and could not complain that they have been taken by surprise or prejudiced in any way. In view of this fact and having regard to the statement by learned counsel for the petitioners that he did not maintain that Mr. Lye's alleged conduct amounted to fraud, I refused the last minute application to strike out paragraph 23 of the petition.

The facts concerning the issue between the parties over Vunamoli are as follows:-

In 1954 the company was negotiating with the Fijian owners and other persons on their behalf for the grant of mining rights on a royalty basis over land at Vunamoli. At the material time Mr. Lye was a director of the company as the representative of Metal Traders and I am satisfied that Mr. Lye knew of these negotiations. He firmly believed the company's efforts would not succeed because of its inability to finance the necessary mining operations.

In 1955 Mr. Lye took part in conversation which led to negotiations with the Lands, Mines and Surveys Department of the Government of Fiji for the grant of a mining lease over the area to himself on behalf of Metal Traders Incorporated. He admits he did not inform his fellow directors in the company of his actions or of his intentions. On several occasions when he was asked for information by Mr. Falkingham he did not avail himself of the opportunity of disclosing that because he did not believe the company's efforts to secure mining rights over the land on a royalty basis would be successful he was negotiating for a mining lease over Vunamoli on behalf of Metal Traders.

There is no evidence that Mr. Lye did anything either to assist the company to secure mining rights in Vunamoli or to prevent it from doing so. When however the opportunity arose for him to secure these interests for Metal Traders he did so without disclosing his actions or intentions to the company.

I am satisfied that whilst Mr. Lye was carrying on these negotiations over Vunamoli on behalf of Metal Traders he deliberately avoided giving the directors of the company any information about them. I believe he adopted this attitude because he believed he had no duty to disclose such information to the company any more than he had to disclose it to other mining concerns in Fiji.

I accept Mr. Lye's emphatic denials that he acted dishonestly or fraudulently but in the best interests of Metal Traders and in accordance with his duty towards Metal Traders as he saw it. I reject the allegations which have been made against Mr. Lye's integrity on this score.

On 12th November, 1955, Mr. Lye entered into an agreement whereby one undivided half share of a prospecting licence over the land concerned amounting to 500 acres was conveyed to him for the sum of 1s. This transfer (Exh. Q.) was put in, in evidence, by Mr. Lye.

On 9th November, 1956, notice of an application by Mr. Lye and one Sitiveni Raidriwe for a mining lease over 81 acres of land called Vunamoli No. 2 was given in the Royal Fiji Gazette. Mr. Lye admits that he is now about to complete these transactions and that mining operations have already begun.

The first question in this case is: "What was the duty owed to the Company by Mr. Lye, a director, of the company representing Metal Traders Incorporated, having regard to the fact that Mr. Lye was also the representative of Metal Traders' other interests in Fiji at the material time?"

I will first refer to a resolution passed by the members of the company on 5th May, 1954, whereby they each agreed to allow their fellow members the opportunity of taking up shares in any other mining interest they might acquire. At that time Metal Traders were not shareholders and had no director on the board representing them. They were merely secured creditors of the company.

On about 22nd November, 1954, Mr. Lye was appointed chairman of the board of directors of the company as the representative of Metal Traders Incorporated.

There is no evidence that either he or Metal Traders Incorporated were ever given express or implied notice of the terms of the resolution dated 5th May, 1954. There is no evidence that they ever agreed to be bound by the terms of this resolution. In my opinion therefore neither Mr. Lye nor Metal Traders Incorporated were or are bound by its terms.

It has to be considered whether it was correct for Mr. Lye on behalf of Metal Traders Incorporated, whilst he was in fact chairman of the directors of the Company to hold any discussions or negotiations with third parties concerning the grant of mining rights over Vunamoli to him on behalf of Metal Traders Incorporated without full disclosure of his actions to the Company. That he did this is not disputed. That he knew that the company wanted to acquire mining rights over Vunamoli on a royalty basis is also not disputed.

Metal Traders' interests in Fiji are to obtain ore. Mr. Lye was their representative both on the board of the company and also in respect of their other interests in financing other mining ventures in Fiji. It is clearly open to a person who is merely a shareholder of a company to lend money on the security of a debenture or to take up shares in another Company without making any disclosure to either Company of such transactions. As soon however as this person becomes a director of a company in which he owns shares, his freedom of action becomes subject to certain limitations.

The director of a company stands in a fiduciary relationship towards the company. By becoming a director his complete freedom of action as a shareholder becomes restricted.

The fiduciary nature of the position of a director was referred to in the case of Regal (Hastings) Ltd. v. Gulliver [1942]1 All ER 378, where the authorities were reviewed by the House of Lords.

At page 381 Viscount Sankey said:-

"In my view the respondents were in a fiduciary position and their liability .... does not depend upon proof of mala fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect .... The earlier cases are concerned with trusts of specific property .... The rule however applies to agents as for example solicitors and directors when acting in a fiduciary capacity."

and he proceeded to quote with approval from the headnote of the case of Hamilton v. Wright (1842) 9 Clark and Finnelly, House of Lords Cases, at page 111:-

"A trustee is bound not to do anything which can place him in a position inconsistent with the interests of his trust or which can have a tendency to interfere with his duty in discharging it."

In the judgment of James L. J. in the case of Parker v. McKenna (1874) 10 Chancery Appeal Cases 96 quoted by Porter L. J. in Regal v. Gulliver appears the following passage:-

" .... it appears to me very important that we should concur in laying down again and again the general principle that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge of his principle; that the rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument, as to whether the principal did or did not suffer any injury in fact, by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."
Again, to quote from the judgment of Lord Russell of Killowen in Regal v. Gulliver at page 386:-

"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."

In the case now before me it might well be thought that Mr. Lye, as a director of the company owed a duty to the company which was quite irreconcilable with his duty to his own principals, Metal Traders, whose representative he was on the board of the company and whose agent he was in other respects in Fiji. It might be thought that on the authorities which I have cited he was permanently on the horns of a dilemma and that whatever he did, whether he acted in the best interests of the company or of Metal Traders, he could be said to be committing a breach of duty towards the other. But that this is not so is made abundantly clear from the following extract from the judgment of Porter L. J. in the House of Lords in Regal v. Gulliver at page 394:-

"The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; but Lord King, L. C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity. It is, however, not true that such a person is absolutely barred, because he could by obtaining the assent of the shareholders have secured his freedom to make the profit for himself. Failing that, the only course open is to let the opportunity pass. To admit of any other alternative would be to expose the principal to the dangers against which James, L. J., in the passage I have quoted uttered his solemn warning. The rule is stringent and absolute, because' the safety of mankind' requires it to be absolutely observed in the fiduciary relationship."

I am quite satisfied, on the authorities, that Mr. Lye's duty as a director of the company representing the shareholders Metal Traders Incorporated knowing that the company had made an attempt to obtain mining rights over Vunamoli was to do all that he could to obtain those rights on behalf of the company. When, as he says was the case, he came to the conclusion that these rights would not be granted to the company his duty was to make full disclosure to the company before proceeding to attempt to acquire the same or similar mining rights in Vunamoli on behalf of Metal Traders Incorporated and not to do so until he had obtained the approval of the company in general meeting. This would apparently have been a mere matter of form since Metal Traders Incorporated was the largest shareholder and thereby could have controlled the voting. Nevertheless Mr. Lye was, in my opinion, in breach of duty towards the company as a director in entering into arrangements to secure mining interests over Vunamoli on behalf of Metal Traders Incorporated without the full knowledge and approval of the company given in general meeting.

I am therefore of the opinion that Mr. Lye committed a breach of duty as a director of the company. That he has on behalf of Metal Traders made a profit out of Vunamoli is hardly open to question. He admits he has received a dividend of over £1,000 already and he has emphatically refused to agree to hold his interest in Vunamoli in trust for the company. I do not believe he would have refused to do this had these interests not been a source of profit to him on behalf of Metal Traders in the past and a probable source of profit in the future.

It now has to be considered whether Mr. Lye's breach of duty as a director alone is sufficient ground for winding up the company. In normal circumstances the answer to such a question would undoubtedly be "No". The proper remedy is to remove the director.

In the present case however it would not be possible for the petitioners to remove Mr. Lye, or any other representative of Metal Traders from the Board of Directors, since Metal Traders can control the voting of the company in general meeting and Metal Traders have shown in the course of these proceedings that Mr. Lye's actions have had their approval.

It is a matter of regret that the efforts made to settle this dispute have not been successful. I neither know nor wish to know whether it has been the attitude of one side or the other to this dispute which has prevented a settlement being reached.

I am, however, satisfied that the results of Mr. Lye's breach of duty as a director are such, that, in the particular circumstances of this case, since no other method of settling the dispute within this company has been found, it is just and equitable that it be wound up.

I appoint the Official Receiver the liquidator of the company.